Transaction Costs of Factor-Investing Strategies

Li, Feifei; Chow, Tzee-man; Pickard, Alex; Garg, Yadwinder

doi:10.1080/0015198x.2019.1567190

Cited by 22 publications

(7 citation statements)

References 28 publications

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“…The period of six months has been chosen because long enough for the calibration of the cash flow model to be reliable but short enough to give us a good number of data points to analyze. In any case it is broadly consistent with several portfolio strategies discussed in(Li et al, 2019).5 InBarber et al (2001) market-weighted rather then equally-weighted portfolios are considered. Their choice is consistent with the use of daily rebalancing and with the size of their sample.…”

supporting

confidence: 62%

Stock Recommendations from Stochastic Discounted Cash Flows

et al. 2020

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This paper presents two stocks recommendation systems based on a stochastic characterization of firm present value that extends the conventional discounted cash flow analysis. In the Single-Stock Quantile recommendation system, the market price of a company's stocks is compared with the estimated distribution of the company fair value to obtain an individual measure of mispricing, while in the Cross-Sectional Quantile system, a relative measure of mispricing is built using the fair value distribution of all firms at the same time. Both systems use mispricing information to build sell side and buy side portfolios. We provide a series of statistical exercises that show how these portfolios can consistently deliver significant excess returns, also when rebalancing costs are accounted for.

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confidence: 62%

Stock Recommendations from Stochastic Discounted Cash Flows

et al. 2020

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“…They argue that transaction costs reduce the expected returns but, when using sophisticated cost-mitigation techniques, the abnormal returns are still significant after accounting for the costs. Li et al [28] emphasized that the market impact costs may erode the expected returns on factor-investing strategies and showed that the costs are related with some liquidity characteristics like turnover rate and turnover concentration. Based on these findings, they argued that the market impact costs can be reduced when the index construction methods are thoughtfully designed; they suggested sophisticated techniques of factor index design-such as distributing rebalances over multiple periods to mitigate turnover concentration, constraining portfolio selection rules to limit turnover, and weighting by a metric correlated with market impacts.…”

Section: Price Impact Costsmentioning

confidence: 99%

Is Factor Investing Sustainable after Price Impact Costs? The Capacity of Factor Investing in Korea

Kim

Park

2019

Sustainability

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This study investigates whether the profitability of various factor investments is sustainable after costs due to price impact, and estimates the capacity of strategies in the Korean stock market. With various initial amounts invested as of the end of December 2000, we analyze after-cost-returns on factor investing during the period from January 2000 to December 2017, and estimate the break-even fund size and maximal profit fund size. To this end, whenever rebalancing factor-investment portfolios based on trading rules, the number of shares of stocks to be bought and sold is computed and the price impact costs of the transactions are taken into account. This procedure computes the implicit cost of trading of factor investing to produce after-cost-returns for various initial amount invested. While the momentum and value factors perform well before price impact costs, the profitability factor performs better after price impact costs. More specifically, the break-even fund size is estimated to be 1.4 trillion Korean won (KRW), and the maximal profit generating fund size is estimated to be 750 billion KRW which could attain a monthly net profit of 1.9 billion KRW over the sample period.

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“…In this model we design multi-asset trading strategies mimicking factor investing style, see e.g. Li et al (2019), which traders can implement.…”

Section: Heterogeneous Agent Based Model: Factor Investing Strategiesmentioning

confidence: 99%

Multi-Asset Bubbles Equilibrium Price Dynamics

Cordoni¹

2022

Preprint

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The price-bubble and crash process formation is theoretically investigated in a two-asset equilibrium model. Sufficient and necessary conditions are derived for the existence of average equilibrium price dynamics of different agent-based models, where agents are distinguished in terms of factor and investment trading strategies. In line with experimental results, we show that assets with a positive average dividend, i.e., with a strictly declining fundamental value, display at the equilibrium price the typical hump-shaped bubble observed in experimental asset markets. Moreover, a misvaluation effect is observed in the asset with a constant fundamental value, triggered by the other asset that displays the price bubble shape when a sharp price decline is exhibited at the end of the market.

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Transaction Costs of Factor-Investing Strategies

Cited by 22 publications

References 28 publications

Stock Recommendations from Stochastic Discounted Cash Flows

Stock Recommendations from Stochastic Discounted Cash Flows

Is Factor Investing Sustainable after Price Impact Costs? The Capacity of Factor Investing in Korea

Multi-Asset Bubbles Equilibrium Price Dynamics

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